A Great Moderation in the Margin of Safety

So I'm making use of FRED's L.1 Credit Market Debt Outstanding page that I found yesterday.

In its default proportions:

Graph #1: DFS, Debt Securities and Loans, Assets relative to Liabilities.
Talk about a Great Moderation!

The domestic financial sector moderated its reliance on debt as a financial asset (relative to debt as a liability) until it was down almost to zero.

If you look real close, you can see increase since 2008. Apparently we did learn something after all from the disruption of 2007-2010. (You can click the graph to see it bigger if you want. But that won't make the blue line rise more sharply after 2008.)

 Debt securities and loans, apparently not a popular financial asset in the nonfinancial sector either:

Graph #2: DNS, Debt Securities and Loans: Assets relative to Liabilities
This one surprised me. It's not going up.

Interesting, the long and persistent decline that corresponds to the Golden Age. Perhaps that was a time when income from real assets was about as good as income from financial assets. Financialization was on the rise no doubt, but it hadn't yet tipped the scales.

It would seem so:

Graph #3
Blue: NCB, "Debt Security & Loan" Assets as a percent of Total Assets
Red: NCB, "Total Financial Assets" as a percent of Total Assets

Debt securities and loans, one type of financial asset held by Nonfinancial Corporate Business, shows persistent decline (blue) except during the 1979-1994 period.

However, total financial assets held by Nonfinancial Corporate Business (red) shows persistent increase from the late 1940s to the year 2000. (Financialization was occurring all through that time, though indeed faster after 1982. But financialization did not suddenly stop in 2000 when the red line stopped going up. No. Financialization kept on going. The red line stopped going up because financialization is unsustainable, as Thomas Palley says.)

The decline of the blue line and rise of the red suggests that since the late 1950s, possibly before, financial innovation was actively inventing new financial assets that were more appealing than debt securities and loans.

The fact that the red line actually turned downward and did not resume increase after the 2001 recession was a warning of impending doom. The earliest warning I've seen of it.

Okay. Given that "debt security and loan" assets have been shrinking while "total financial assets" have been rising (as graph #3 shows) for nonfinancial corporate business, maybe something similar has been happening in the domestic financial sector (graph #1) so that their total financial assets are not shrinking relative to their financial liabilities. I need one more graph:

Graph #4: DFS, Total Financial Assets relative to "Debt Security and Loan" Liabilities

Hey, I'm no economist. But it sure looks to me like the boys in finance reduced the margin of safety, lowering their assets per dollar of liability to gain -- I dunno what -- additional flexibility in their wheelings and dealings, maybe. I dunno why they did it, but I can certainly see that they did it. They reduced the margin of safety, looked at the result, said "so far, so good," and reduced the margin of safety some more. They started in 1947 and they kept at it until one day, 60 years later, when they looked at the result and said "uh-oh."

And then we had a financial crisis.

 

Oh, I'm sorry: The boys and girls in finance reduced the margin of safety, yadda yadda.